Time For Gamma Long In Crude?

Crude is weak this am, led by the middle of the barrel products, especially Gasoil. In relative value terms, SFOT is positioned rightly being short cracks in middle distillates. Sources in the physical space suggests to him there is much in storage, and the widening contango helps, but storgage space is drying up and there is no end user demand. Another instance of weakening demand is happening in Asia, where airlines’ demand for aviation fuel has dropped to a level that took prices to lowest in a year. Smilar to Gasoil, any strength is probably an opportunity to sell into, as the sheer amount of inventories available just cannot make any strength sustainable. However, SFOT thinks these relative values within the barrel is being overshadowed by 2 market movers over the past few days.

1) Headlines in the CITY AM paper today: “BROWN CRUSHED AS VOTERS DUMP LABOUT”. GBP continues its slide 4 days on the trot, coming off 5% from its high. This is dragging the EUR down at the same time and we need no longer go into the discussion what the impact on WTI is due to EUR strength.

2) Short rates in US rose over 40bps in 2 days. While the macro punters were having nice MTMs due to reflation play, curve steepners, owning inflation assets like WTI in Dec10 and Dec11, this latest spike in short rates seemed totally unwelcomed. A rate hike fully discounted by year end?? Little wonder equity markets are not happy over this as well. Whatever the case, vol in most asset classes should start to pick up a little as this situation seems like a little preview of what can happen if those ‘greenshoot’ trades are overdone.

Direction in crude oil should continue to be dominated by a gloabl macro theme now, and at the moment it looks weak. However, all could change, as the momentum seems to be on the upside. More buying of 100calls in 1-2yr out period, especially from speculators as CFTC reveals both open interest and net length on the up. Perhaps now is a good time to own some gamma, and SFOT shall do just that for a short term punt.

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